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Goodbye to cheap oil

Salon.com ran an article on June 15 by Michael Klare called ‘Goodbye to cheap oil‘, in which the author discusses the latest International Energy Outlook (IEO) report by the Energy Information Administration (EIA) of the U.S. Department of Energy. This, in itself, is nothing remarkable, as the DOE publishes an updated IEO every summer.  

What is notable, however, is the startling revelation in the 2009 report that the EIA is predicting a “sharp drop in projected future world oil output (compared with previous expectations) and a corresponding increase in reliance on what are called ‘unconventional fuels’ — oil sands, ultra-deep oil, shale oil and biofuels.”

Why is this significant? First, the EIA is not exactly known for making impetuous predictions on global energy supplies. It is a highly respected government agency that, if anything, can be overly optimistic when it comes to discussions of peak oil and projected oil prices. Second, the EIA has significantly downgraded its own output projections of only two years ago. 

As Klare says, “As recently as 2007, the IEO projected that the global production of conventional oil (the stuff that comes gushing out of the ground in liquid form) would reach 107.2 million barrels per day in 2030…Now, the latest edition of the report has grimly dropped that projected 2030 figure to just 93.1 million barrels per day  an eye-popping decline of 14.1 million expected barrels per day.

Many have long been arguing that the era of cheap oil is coming to an end but others (like the IEO) have been more circumspect. Why the change of heart now and what does this mean for the global economy? After all, our  economic system has been entirely built upon on an abundant and cheap supply of oil to facilitate trade, produce food, move goods and people and so on?

It seems the IEO has realized at last that the rapid pace of economic growth in countries such as China and India will soon outstrip supply. And as Klare points out, this could “drive up prices again and threaten recurring and potentially disastrous economic disorders — possibly on the scale of the present global economic meltdown…In EIA terms, this is pure gloom and doom, about as deeply pessimistic when it comes to the world’s future oil output capacity as you’re likely to get.”

This clearly has implications for the tar sands of Alberta, where production will continue to rise, as will the associated costs of extracting the bitumen – “a thick, gooey material that must be dug out of the ground and treated in various energy-intensive ways before it can be converted to synthetic petroleum fuel (synfuel).” Accelerated production of the tar sands means a massive rise of pollution, CO2 emissions, water consumption and environmental destruction of the boreal forest. All while Canada is trying to reduce its CO2 emissions.

The geopolitical implications of dwindling oil reserves are enormous and could fundamentally reshape international power relations. At the same time, the economic upheaval of rising oil prices (and possibly rising food prices) could lead to social breakdown and unrest of unprecedented proportions. As Thomas Homer-Dixon says in the interview on this blog, changes of the magnitude we require only happen when societies are galvanized by some kind of crisis. “We are going to have some systemic breakdowns like we are seeing now in the global economy and people need to be prepared to push our society in positive directions when the moment is ripe.” 

The coming oil crisis might be just such an opportunity and it may come sooner than we think.

Categories: Energy economics
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